Is it time for the UK to attach conditions to the Brexit divorce bill?

Julian Jessop is an independent economist who was formerly Chief Economist at the Institute of Economic Affairs.

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The UK’s willingness to pay a large ‘divorce bill’ as part of the withdrawal agreement from the EU still rankles with many – and understandably so. It is not immediately obvious why the UK should continue to contribute to the EU budget long after Brexit, especially when the EU appears reluctant to offer us better terms on the future relationship than it would to any other country. Should the Prime Minister now be ready to use this money as a bargaining chip, or has that opportunity long since gone?

Unfortunately, as with so much of the Brexit process, this isn’t as simple as it could be. For a start, the divorce bill is actually about the past. The Prime Minister pledged in her Florence speechthat “the UK will honour commitments we have made during the period of our membership”. This is all that the financial settlement does.

It is therefore wrong for Remainers to claim that the divorce bill is a ‘cost’ of Brexit. In reality it is money that the UK would have had to pay anyway, had it still been a member. But nor is it anything to do with the future relationship, and it is not meant to be a down payment for a comprehensive free trade deal or streamlined customs arrangements. Indeed, the UK shouldn’t be expected to pay extra for these benefits anyway, since they would help both sides.

You could argue (as I have) that the UK’s willingness to continue to contribute to the EU’s annual budget until the end of 2020 should be seen as a quid pro quo for the EU’s offer of a standstill transition period over this timeframe. But that’s not strictly what it’s supposed to be. In any event, these annual payments account for less than half of the estimated £35-39 billion total cost of the financial settlement, as detailed by theNAO.

It is true that many (including aHouse of Lords committee) have argued that the UK would be on strong legal ground if we decided to walk away without paying a penny. But I’d still be wary of assuming this a strong card. Whatever the legal technicalities, it could be seen as very bad faith – and not just, I suspect, in the rest of Europe.

Has the EU’s behaviour to date really been unacceptable enough to justify this? Some might well say it has – citing the ‘weaponisation’ of the Irish border in particular. Or have EU officials simply made the most of the UK’s own indecision and/or incompetence, while sticking to their principles, asSir Ivan Rogersand others have argued?

What’s more, the UK and EU still haven’t started talking about the long-term relationship beyond the transition period(s) – including the terms of a trade deal. Isn’t it too soon to conclude that we can’t get a good deal without threatening to renege on commitments made on money?

I also don’t think its sufficient to say we can walk away and simply fall back on WTO rules, regardless of what the EU thinks of us. There are a myriad of other areas of cooperation – non-economic as well as economic – where the goodwill of the rest of Europe will be important. And third countries looking to do trade deals with the UK might not be impressed if we appear to go back on promises to our former partners in the EU.

Finally, even £39 billion would be less than 2% of one year’s UK GDP, spread over many years, and just a few tenths of a percent of the GDP of the rest of the EU. It would be a pain for the other countries of the EU to have to fill the gap, but these sums are simply not large enough to be game-changers.

Overall, then, the divorce bill probably isn’t as powerful a bargaining chip as many seem to think. But let’s be absolutely clear that it remains part of the UK’s hand. Whatever the numbers, this is still our money, and needs to be properly accounted for. If the next phase of the negotiations do go sour and, in particular, if the EU drags its feet over a comprehensive trade deal, the cash should surely come back into play.

I’m happy to let the lawyers and officials argue about the details of what is still possible. But as a layman, it seems perfectly reasonable for the UK to attach conditions to the financial settlement, even at this late stage.

For example, we could agree now to pay the annual contributions up until the end of 2020 (perhaps £16 billion), regardless of the progress of the talks. This would go a long way towards meeting the Prime Minister’s Florence pledge, which was that our partners shouldn’t fear “they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave”.

However, if over this period the UK and the EU can’t agree a satisfactory long-term deal (or, of course, if the UK withdraws from the EU with no agreement) we should retain the remainder of the settlement that relates to outstanding budgetary commitments beyond 2020. After all, “nothing is agreed until everything is agreed”.

Now that the Government has subdued the parliamentary rebels at home, it’s time to get on the front foot with the EU.